The author is a Forbes contributor. The opinions expressed are those of the writer.

Loading ...

Loading ...

This story appears in the {{article.article.magazine.pretty_date}} issue of {{article.article.magazine.pubName}}. Subscribe

When Myron (Mike) Ullman III returned to the helm of J.C.Penney on April 8, I knew that the near term outlook would be very murky.

The just released preliminary 1Q13 figures certainly support our concern. Sales slumped an estimated 16.4% over the preceding year’s first quarter. That is a decrease of $517 million. Comparable store sales fell 16.6%. This first quarter decrease is in addition to the $4.3 billion in sales the company lost last year. Some of the current decrease has been attributed to construction of the home department in 505 stores.

These figures were released on a preliminary basis in order to facilitate communication with investors surrounding the proposed senior secured loan financing transaction. The company also announced that on May 4, 2013 it had about $821 million in cash and cash equivalent and total debt of $3.8 billion. The debt includes amounts outstanding on the revolving credit facility of $850 million, long term debt of $2.9 billion and capital leases and notes payable of $100 million. I estimate that the company burned about $900 million cash in the first quarter. The full sales and earnings report for 1Q13 will be released after 4 p.m. on Thursday, May 16, 2013.

The shadow of Ron Johnson hovers over the company. As the home department drags on sales, one wonders about certain classifications in home that were completely ignored and have to be revived. Surely the Martha Stewart trial diverted attention, but the fact that the home businesses had already lost momentum could be seen on the shelves of J.C.Penney. In the past, there always was strong color coordination for the home - a fact I admired when the company was headquartered in New York many years ago. J.C.Penney home products represented excellent quality and extraordinary value, especially the J.C.Penney towel.

Today, this needs rebuilding. The merchandise on the shelves now is non-absorbent Indian goods rather than merchandise from Turkey or the United States. Fashion coordinates for the bedroom were always exciting but have been displaced by irrelevant merchandise. The home was a product and merchandising strength for the company; it created traffic. I am sure that it will be rebuilt under Ullman.

Looking ahead, I believe that the second quarter will not have the merchandise needed to generate strong sales through promotions. I think the first signs of a turnaround in sales will be seen in the third quarter of this year, and that the Christmas season will see a strong pickup of sales. This year the calendar is against every retailer’s results since Christmas falls on a Wednesday and there is one less week in the period. This will result in a late shopping season for many customers. In addition, profits will be hurt because the extra week in 2012 leveraged expenses by at least 1 ½ % which will be hard to make up this year.

J.C.Penney has strong support among its vendors. They feel the management team that Mike Ullman is forming will be creative and will produce satisfactory results. Even Warren Buffett said so on CNBC! Buffett’s Fruit of the Loom Company owns the Vanity Fair lingerie brand which is sold in J.C.Penney. It is important for the future of J.C.Penney that the legacy vendors come back and support management’s effort to revive the company after 17 month of irrational and disruptive activity. Some brands like Joe Fresh and Izod will certainly remain in some stores in the future, but other brands that were brought in during the Johnson regime will have to prove themselves as valued team players.

One wonders about the Board of Directors, that, until recently was a paragon of inaction. Maybe they were cowed by Bill Ackman and Steven Roth, the two activists. Maybe the two activists are waiting for the stock to recover before they leave the board. They have not been helpful in creating a dynamic growth company—just the opposite--they brought about the disaster that Mike Ullman now has to fix.